By John Richardson
THE reasons cited for last week’s global sell-off in stock markets (see the above chart of the Nikkei up until Thursday last week) were concerns over volatility in the Japanesegovernment bond market and the economic slowdown in China.
Some investors, however, believe that markets have just taken a pause for breath as a result of profit taking and that, fundamentally, everything remains fine.
We don’t believe that this is the case.
The problem is that huge quantitative easing programmes being carried out by the Fed and more latterly the Bank of Japan are having “hallucinatory effects” on investors, who are mistaking stock market rallies for real economic recovery in the West, wrote Stephen King of HSBC in this FT article.
They are also ignoring the slowdown in China, which is not just a temporary phenomenon but instead is the result of a determined and long-term shift in policy direction by Beijing.
And, returning to Japan, Reuters wrote in this article: “The old status quo of household saving, current account surpluses and low fiscal deficits has been chucked out of the window. There are more spenders than savers in Japan, and the country is close to facing a current account deficit as well as running a budget deficit of more than 10% of GDP.
“Meanwhile, Japan’s public debt to GDP is approaching 230%, the highest percentage of any nation in the world, with the debt largely funded domestically.”
Hence, the volatility in Japanese government bonds.
Another problem is that trade tensions are bound to increase across Asia as a result of the weakening of the Yen. China has already talked about depreciating the Yuan.
The issue for Japan, and indeed any country that seeks recovery through exports, is that you cannot export your way to recovery when global demand is so weak.